Sri Lanka’s electricity tariff structure is outdated, inefficient, and riddled with distortions that undermine transparency, equity, and economic sustainability, according to a new policy submission by the Advocata Institute.

The Colombo-based think tank has formally proposed a comprehensive overhaul of the current pricing system to the Public Utilities Commission of Sri Lanka (PUCSL), urging reforms that better reflect the realities of electricity generation and consumption.

“Electricity tariffs in Sri Lanka have never made much economic sense,” the report states. “They are full of distortions, cross-subsidies, and based on outdated assumptions.”

Advocata’s proposals emphasise that electricity, unlike many other commodities, is homogeneous, non-storable, and highly time-sensitive in terms of cost. As such, any rational pricing system must be cost-reflective and sensitive to demand fluctuations throughout the day.

The current tariff structure categorises users—such as domestic, industrial, government, religious, and charitable—under different rate schedules. However, these distinctions often lack a clear rationale. The institute notes, for instance, that a restaurant in a hotel may pay a lower rate than an identical establishment in a shopping mall.

Advocata argues for unifying these classifications into a single bulk user category, removing arbitrary differences that penalise modern service industries such as IT and BPO while subsidising less competitive, energy-intensive industries.

The think tank also recommends eliminating special tariffs for religious and charitable institutions, suggesting that any concessions be funded through direct budgetary support rather than through tariff distortions.

Drawing on global best practices, Advocata has outlined five guiding principles for electricity tariff reform:

1. Cost-reflective pricing – Covering generation, transmission, distribution, and system losses.

2. Non-discrimination – Equal treatment for similar consumption patterns, except for targeted subsidies.

3. Time-of-use (TOU) tariffs – Encouraging efficiency by varying rates based on the time of day.

4. Regulatory clarity – Ensuring the PUCSL focuses on pricing and sustainability, while social objectives are met through fiscal transfers.

5. Minimization of cross-subsidies – Promoting transparency by funding social goals via the national budget.

Key reforms proposed by Advocata include:

Expanding TOU pricing across all user categories to encourage off-peak usage and reduce system strain.

Replacing multiple subsidies with a single lifeline tariff targeted at low-income households.

Reforming solar net metering to better reflect time-based costs, supporting grid stability.

Avoiding penalties on remote work, which benefits the broader economy through reduced congestion and emissions.

Introducing spot market pricing for bulk users, akin to Singapore’s Energy Market Company model.

Advocata urges greater transparency from the Ceylon Electricity Board (CEB), recommending the publication of detailed quarterly cost breakdowns—including generation, transmission, distribution, and administrative expenses—as well as all major procurement contracts.

The think tank also calls for performance-based incentives within the CEB and strict accounting for technical, commercial, and collection losses, all of which should be minimized before being factored into tariff calculations.

“Distorted tariffs don’t just cause financial losses—they misallocate capital, confuse consumers, and stifle innovation,” Advocata said. It argues that electricity should not be used as a vehicle for hidden welfare programs. Instead, social equity should be ensured through transparent, direct fiscal transfers from the Treasury.

Advocata urges the PUCSL to:

Eliminate discriminatory pricing while preserving a targeted lifeline tariff for the poor.

Implement TOU tariffs broadly and introduce real-time pricing for large users.

Ensure complete cost transparency through independent audits of the CEB.

Avoid using tariffs for redistribution, leaving that responsibility to the government’s fiscal authorities.

“These reforms are essential to ensure the long-term sustainability of Sri Lanka’s electricity sector, attract investment, and align with global best practices,” the think tank stated.